Looking ahead what the diabetes world could look like

Looking ahead what the diabetes world could look like

Yesterday everyone learned that the FDA has the power to change the competitive landscape in the hotly contested insulin market. While the agency didn’t turn away Tresiba® and Ryzodeg® from Novo Nordisk (NYSE:NVO) they did deal a serious blow to their future revenue stream and earnings. Although Diabetic Investor did not hold the lofty revenue expectations of many analysts we did see the two drugs reaching blockbuster status and providing some incremental benefits to patients.

Yet with the FDA’s complete response letter now in hand, Novo who is unlikely to walk away from either drug as they have millions invested already, has some serious decisions to make as they move forward. By most estimates Tresiba and Ryzodeg are delayed at least two years possibly longer, this means that should the two drugs actually clear the FDA, by no means a guarantee at this point, they would come to mark just about the time a generic version of Lantus was also hitting the market.

There has been a great deal of debate within the diabetes community as to the path generic insulin will take to get to market and whether or not the companies who make these generics have the financial resources to see the drugs through the FDA’s increasingly tough approval process. Everyone seems to agree that we will see generic versions of both short and long acting insulin, but no one seems to know when we will see them and just how profitable they might be when they get here. Keep in mind generic drug makers are all about keeping costs low and generic insulin will be more difficult to get through the regulatory process.

Now these facts haven’t stopped some very large and experienced companies from trying as Lilly (NYSE:LLY) is working on a generic version of Lantus and at one time it looked like Pfizer (NYSE:PFE) would be in the generic insulin business. Diabetic Investor believes one of the reasons these larger companies are interested in developing a generic insulin has to do with the fact that unlike generic pills which come to market priced 80% less than the branded product, generic insulin will come to market priced 30% to 40% lower than the branded products. Given the fact that diabetes continues to grow at epidemic rates and insulin usage has been rising, these companies can still make a decent profit.

Looked at realistically the biggest threat to generic insulin is not getting the products through the FDA; rather it will come from the branded products. Since generic insulin will not offer huge discounts over the branded product it is quite possible a company like Sanofi (NYSE:SNY) will bite the bullet and lower the price of Lantus to fend off generic competition. This allows the company to continue to make some money while at the time get its new version of Lantus through the FDA. Sanofi could easily reason that lowering the price of Lantus protects the Lantus brand and actually creates a built in customer base for the new version on Lantus when it comes to market. This is not unlike what Microsoft has done with their popular Office software or operating system. Microsoft knows that not everyone will upgrade to the latest version but they also know a percentage will and they make a tidy little profit from those who do.

There is also another possibility as with generic insulin, short or long acting, it’s quite possible we could see a device company partner with a generic company to boost sales of their diabetes devices. The fact is there really isn’t much difference the three branded short acting insulin’s and while the companies would disagree they are interchangeable. Or put more simply a patient wouldn’t notice much of a difference. Given that there is no performance difference how the insulin is delivered takes on greater importance. It’s no secret that one of the main reasons Novo overtook Lilly was not the performance of NovoLog® but the fact that it came in a very patient friendly pen delivery system. The simple fact is insulin delivery systems matter.

A company like Johnson and Johnson (NYSE:JNJ) who owns LifeScan, the world leader in glucose monitoring and Animas, the number two player in insulin pumps could offer physicians a diabetes management system where the insulin is just one component of this system. JNJ would not need to make huge profits on each individual piece of the system but could come out fine based on the collective profits for each piece. This could be one reason why JNJ bought Calibra who makes the Finesse™ patch pump and why we’re hearing they also have an insulin pen under development. The company has already stated they would be entering the pen needle business so it makes sense they would also offer an insulin pen.

JNJ has long coveted Novo Nordisk however given Novo’s ownership structure an acquisition is difficult, if not impossible. With generic insulin JNJ no longer needs Novo and could theoretically do what everyone thought Sanofi was going to do, be the first company to offer a complete diabetes management system. It’s important to note that JNJ also will be the first company to have a SGLT2 on the market which basically means their system could work for non-insulin using patients as well as insulin using.

Too many companies in the diabetes space view the market as one dimensional when in fact it’s multidimensional. With pricing pressure continuing into the foreseeable future, the days of having just one product, whether it’s a drug or device, will become rare.  In fact it would not surprise Diabetic Investor if Merck (NYSE:MRK) uses their Januvia franchise as a launching pad into a broader line of diabetes drugs and devices. Merck is one the few companies in the space whose pipeline looks exciting and they have the resources should they wish to acquire a device company.

The mistake most people are making when looking into the future and trying to gauge the impact of generic insulin is they believe generic insulin has to cost sustainably less than the branded products. A generic Lantus or NovoLog can do as much damage priced at 30% less than they would if they cost 50% less. Actually in some respects this spread between the generic and the branded product could do more damage as it is pretty easy for a branded company to throw in the towel when the generic is priced 80% below the branded product, the decision however becomes more complex when the price differential is 30% or 40%.

Whatever the eventual outcome one thing is certain, prices aren’t going up and diabetes companies will need to find additional profit centers in the future. There was a time not that long ago when Microsoft would have never considered getting into the hardware side of the business. The company was making boatloads of money from selling software and there didn’t seem to be any need to get into what many thought was a commodity business. Yet as Apple rose from the ashes and began stealing share, combined with the conversion from desktops to laptops and then tablets, Microsoft all of sudden was faced with prospect that the hardware that used their very profitable software could become extinct. Microsoft had a decision to make either support the companies that make hardware or get into the hardware business themselves, they needed up doing both.

Looking ahead Diabetic Investors sees a similar path developing and companies become more virtually integrated whether through acquisition or partnership. Like Microsoft, they know that the very existence is being threatened. While it’s taking much longer than Diabetic Investor ever thought it would, the day of one company selling a complete diabetes management system is getting closer and closer.